Property is a very large industry, generally broken down into residential and commercial real estate, but that isn't the only way real estate can be categorized. Property professionals also use a quality assessment to differentiate properties by class. Class A is seen as the highest quality, followed by Class B and Class C in descending order.
The property sector is a major component of the U.S. economy, and while your first touchpoint for a deal might be an agent or real estate broker, the sector includes thousands of professionals. Although there is no universal checklist of what it means to be a Class A property, these professionals, through their collective wisdom and experience, have helped to produce a relatively consistent description of what defines a Class A property.
What is Class A property?
As a general rule, for a real estate asset to be designated Class A property, it needs to have the following characteristics:
- It needs to be of the highest quality.
- It needs to achieve high rents and prices.
- It is often new, meaning less than 15 years old.
- It should be well maintained and be in a desirable area.
For residential property, a desirable area commonly means:
For commercial property, a good location generally means:
- Being located in a central business district (CBD).
- Having good transportation characteristics, such as mass transit or easy access to expressways.
- Being located near good amenities, such as restaurants and service-sector firms like banks and law firms.
Differences between Class A, B, and C properties
If a property professional had no information other than rents or prices for properties in a specific area, they could put those into general categories of average, high, or low. Those with average rents or prices are generally going to be considered Class B, while those toward the top of the range could be considered Class A and those at the other end of the spectrum could be Class C.
This categorization system isn't fool proof, but it is a good rule of thumb. The descriptions below help explain beyond just prices what parameters help decide how properties are classified, but don't be surprised when speaking with real estate agents if they anchor toward price when defining a property's class.
There is a reason most professional sports players retire before they reach forty. They generally still have the fundamentals, but age brings with it wear and tear. The same is true with real estate. Although age itself is not an absolute factor that determines a property's class, it is often an important item that may disqualify a property from gaining a Class A designation.
Older infrastructure systems like elevators or HVAC (heating ventilation and air conditioning) systems can make it easy for an investor to identify shortcomings. Other items could include loads of deferred maintenance or just a critical mass of small defects that weigh down a building's ranking.
Class A and Class B properties often share many of the same fundamentals, but Class A properties are often newer and have more polish. Class C properties, though, are just generally all-around weaker. The challenges for a Class C property aren't usually just a lack of maintenance. Properties considered to be Class C are often located in neighborhoods that have higher crime rates, underperforming schools, and a lack of amenities and may have poorer transportation links.
Instead of having solid tenants providing consistent passive income to their owners, they are likely to have higher vacancy rates and may be short-term rentals. And, as noted above, those rents usually fall toward the lower end of the scale.
Yes, there are even certain types of property lower quality than Class C. It is worth noting that here we are talking about investable property. Generally, there is an active market for Class A, B, and C property. Cities ravaged by a collapse of their employment base or a series of natural disasters may have plenty of property that would be considered below Class C.
Building class definitions